Dealing with debt

There is a natural tendency to start worrying as soon as you hear from a creditor, however, there is a solution to every problem. Many debts can be dealt with quite easily by paying what you can afford, others can be disputed or challenged. Even a court cannot make you pay what you can’t afford.

1

Protect your money

If you have debts with the same bank where you have current and/or savings accounts, the bank can exercise their right to offset. This means they can take money from your accounts to pay debts you may have to them.

For example, if you have defaulted on your loan and credit card repayments but still have your current account with that same bank, the bank could take money from your current account to be paid towards the card and loan.

There are rules that govern set off, however, to be on the safe side it’s always best to open an account with another bank you have not debts with. When choosing a bank, bear in mind that some banks trade under different name for historical reasons, but are still part of the same group. Ideally you should chose a bank that doesn’t belong to any group you have debts with.

If you have taken out payday loans, they’d have obtained your debit card details. Payday lenders have been known to raid debtors’ bank accounts when they don’t pay back on time as agreed. This can leave you without enough money to cover your priority debts.

If you have taken out a payday loan you will not be able to pay back on time, you need to make sure your bank cancels your continuous payment authority. See continuous payments.

2

Deal with priority debts first

Priority debts are the most important, because not dealing with them can result in eviction and/or repossession, disconnection from utilities, visits from bailiffs and even imprisonment.

Priority debts include:

Rent arrears can result in eviction, leaving you and your family homeless.

Mortgage arrears can lead to repossession of your property. If the property is also your home, you and your family could be homeless.

Utilities such as gas and electricity. Your supply can be disconnected if you fall into arrears.

Council tax. If you don’t pay the arrears, bailiffs can be sent to take goods from your home. If you are regarded as someone who deliberately refuses to pay, you can be sent to prison.

Court fines, such as Magistrate’s court fines or parking penalties. If you don’t pay these, the court can use bailiffs to take your goods. The court also has the power to have you arrested if you refuse to pay.

Maintenance payable to a former partner and/or children, including child support owed to the Child Support Agency (CSA). If you don’t pay, a court can use bailiffs to take your goods. If, after this, you still have arrears unpaid, you can be sent to prison

TV licence. It’s a criminal offence to use a television without a licence – you could be fined.

Hire purchase agreements (such as car finance), where the goods purchased can be repossessed, can be considered a priority if, for example, you need your car for work, are disabled or live in a rural area with little transport.

How to deal with priority debts

It is important to contact your priority creditors as soon as you find yourself in difficulty. Explain your situation and ask for more time to pay, get them to agree to allow you 14 or 28 days to sort out your finances.

Do not ignore priority creditors.

Even though other creditors may put more pressure on you to pay, that doesn’t make them more important. For example, councils normally send just two reminders per year, then proceed to issue summons. Debt collectors (DCAs) and payday lenders may ring constantly and/or write numerous letters, that doesn’t make them a priority.

Draw up a budget sheet to determine how much you can afford to pay towards your priority creditors. Once you have your budget, you should get in touch with your creditors with your repayment offer, backed by your budget sheet.

Understand your creditors’ communications

Anything important has to be put in writing and sent through the post, not discussed over the phone, by text or even email. If you receive something in the post, you should open the item immediately and read it carefully.

Letters that creditors are required by law to send, such as default notices, notices of sums in arrears, termination notices and notices of assignment should be sent by post.

Payday lenders usually communicate by email, text or phone rather than sending letters in the post. Make sure you keep a copy of every email sent and received and avoid discussing matters over the phone or by email.

Creditors often send letters threatening a number of things, home visits and legal action being the most common. Most of the time, they don’t carry out such threats, but it’s important not to ignore their correspondence.

If the item you received in the post is one of the following, it should be dealt with immediately, as you have a limited amount of time to respond or take action:

A letter before action (LBA or letter of claim). Usually sent by a firm of solicitors, stating their intention to issue proceedings. Most LBAs are not headed as such, so it’s important to learn to identify them. If you have received a letter that appears to be a LBA, see pre-action conduct.

A county court claim, most often issued through the Northampton Bulk Centre. If you have received a court claim, see money claims.

A statutory demand (SD), which is the first step towards making you bankrupt. Not all creditors go on to petition for bankruptcy after issuing a SD, however, you should always take them seriously. SDs should be hand-delivered by a process server, although they are also often sent by post. You have 18 days to apply for set aside. See statutory demands.

4

Are you liable for the debts?

This may sound like an obvious question, however, debt collectors often contact the wrong person, for example, someone who used to live at the same address or someone with the same surname. The alleged debt could be:

an account you never had

a debt incurred by an ex-partner or family member, such as a parent or grown up child

a debt that has been paid

If a debt collector writes to you out of the blue for a debt you do not recognise, or you are in doubt, you should write to the debt collector, asking them to prove the debt. See prove it letter below.

Get yourself some folders and assign one to each creditor, or use an accordion file. Whenever you receive a letter, staple it to the envelope it came in.

It is important to keep on top of your correspondence. Many people are afraid of the post and don’t open the letters they receive, this is a bad idea, because you can’t deal with your problems unless you know what they are.

You could receive a court claim or even a statutory demand, both of which are very time sensitive – you’ll need to act quickly, so it’s best to know what’s in those envelopes.

Letters and documents may be dated days long before you receive them, make a note of the date you actually received it.

When you receive an item through the post, you should do the following as soon as you can:

Write down on the envelope the date when you actually received it. If you were away, make a note of the days/weeks you were away.

Establish whether a reply is appropriate. It’s important to keep the lines of communication open, however, some items, such as default notices, notices of sums in arrears and statements, do not require a response.

Update your own records and file their letter with your response, if any. Print off a copy of the letter you sent and attach it to their letter. Having a copy on your computer, memory stick or google docs is not enough, in 4 or 5 years time you may not be using the same system and it will be 6 years before the debt is statute barred.

Get yourself a suitable filing system and use it just for your creditors. You could choose one of the following:

An expandable accordion file. They are available in many shapes and forms, choose one with enough pockets and enough capacity for everything. Use one pocket per creditor.

Envelope style plastic folders. If you send SARs to obtain all the data held about you by a company (such as old statements), you may find you need more space than an accordion file provides. Use an envelope for each creditor.

Ring binders are convenient but require more effort on your part when filing, as you will have to punch holes on every item. Plastic pockets are an alternative, but they have limited capacity. Use dividers for various creditors.

Keep electronic copies of all letters you send, as you’ll often have to refer to them and attach a copy. Keep creditor correspondence separate from your work, leisure and home files.

If you have access to an online storage system such as google docs, dropbox, webdesk, etc. create a special folder for creditors letters. They won’t take up much space. Back up regularly.

Keep your records, both physical and digital, for as long as you can.

6

Assess your debts

Some debts are more important than others, some are also easier to deal with than others. You may be able to challenge some of them. Once you have your priority and any secured debts under control, any unsecured debts can be dealt with in various ways:

Repayment arrangements with individual creditors, where you offer them what you can afford every month;

If you have received a court claim you need to deal with it now. See court claims.

7

Draw up a budget

Even if you do not submit an I&E form to your creditors, it’s always useful to fill one in for your own records, in order to determine how much you can realistically afford to pay every month. See budgeting for reference.

Avoid dealing with creditors over the phone, you are under no obligation to talk to them. Write to them and get them to put everything in writing. Avoid responding to texts.

Keep all communication in writing and keep copies of all correspondence sent and received.

Quick calculator

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WEEKLY TO MONTHLY

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Monthly amount

ANNUAL TO MONTHLY

Annual amount

Monthly equivalent

This quick calculator is intended for use with our comprehensive budget calculator, when you need to add up various payments together or convert weekly and annual values to monthly figures. Use the budget calculator to establish how much you can offer your creditors and as the basis for court forms asking for income and expenditure details.

Useful tools

How Much Can I Borrow?

This calculator will tell you the amount a bank should be willing to lend you on a mortgage.

This calculator uses the rule of thumb that most mortgage lenders use. The rule of thumb is that they will lend a maximum of 3.25 times the first income plus one times the second income. Alternatively, they will add the two incomes together and multiply that sum by 2.5 times. If this gives a higher figure than the other method, they will use it.
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